|
A
Report on Support Measures for Small and Medium Enterprises
Chapter
3
Present
situation of SMEs and their challenges
The role of SMEs
| 3.1 |
An entrepreneurial
and industrious workforce has made Hong Kong an important international
financial, trade and transport hub. Making full use of Hong Kong's
advantages in business and commerce over the last hundred years, the
people of Hong Kong have contributed to Hong Kong's economic take-off.
Indeed, a number of international enterprises in Hong Kong today started
their businesses as SMEs. This shows that SMEs are the primary pillar
and driving force of Hong Kong's economic development. |
| |
|
| 3.2 |
According to
a sample survey conducted by the Census and Statistics Department
(C&SD), as at December 2000, there were approximately 290 000
SMEs in Hong Kong, accounting for 98% of local enterprises. They employed
more than 1.36 million people, i.e. about 60% of private sector employees.
SMEs were engaged in different trades and industries. Nearly 90% of
them were enterprises with fewer than 10 employees (see Figure 3-1
and Appendix 6). |
| 3.3 |
Flexibility and
lower start-up and operating costs have enabled SMEs to spring up,
and reposition and adjust themselves quickly in response to market
and economic changes. Moreover, they can easily expand or contract
within a short period of time, to embrace new business opportunities
or pull out where there is an over-supply. SMEs have not only survived
the impact of big enterprises and the law of economies of scale, but
have carved out niches for themselves which enable them to co-exist
with big enterprises. Many SMEs are strategic partners of big enterprises. |
| |
|
| 3.4 |
SMEs play a
pivotal role in the labour market as well. In Hong Kong, nearly 60%
of the working population in private sector are employed by SMEs.
Not only do SMEs provide diversified working experiences for our workforce,
they also help enhance their quality. Indeed, SMEs serve as the starting
point for career path of many young fresh graduates, the venue for
entrepreneurs to realise their vision and aspirations, and the life-long
workplace for many people. |
| |
|
| 3.5 |
The Committee
fully recognises the contributions of SMEs in promoting the growth
of Hong Kong's economy, providing job opportunities, enhancing the
quality of human resources, nurturing a culture of entrepreneurship,
fostering creativity, and opening up new business opportunities. The
Committee firmly believes that SMEs will play an increasingly important
role in the new economy. |
Challenges
facing SMEs
| 3.6 |
Having taken
stock of the status quo of SMEs as well as the challenges they face,
the Committee has arrived at a number of observations as set out below. |
(A)
Macroeconomic challenges
| 3.7 |
The Committee
reckons that SMEs in Hong Kong have to meet the challenges brought
about by three major economic developments, namely the globalisation
of world economy, China's impending accession to the World Trade Organization
(WTO), and the new economic order that has taken shape as a result
of advances in information technology (IT). |
(1) Globalisation
of world economy
| 3.8 |
Globalisation
of world economy facilitates free import and export of goods and services,
and gradually removes restrictions on investment and tariff barriers.
Production processes are therefore no longer limited to a single region.
This in turn will give rise to market and price competition globally.
Globalisation enlarges the market for SMEs on the one hand, and exposes
them to worldwide competition, including competition from low cost
regions, on the other. Local SMEs have to be proactive in mapping
out marketing strategies, with a view to consolidating existing markets
and capturing new markets. |
(2) China's
accession to the WTO
| 3.9 |
China's accession
to the WTO and, in consequence, the opening up of the vast the Mainland
market will have profound impact on SMEs in Hong Kong. While enormous
business opportunities will be generated, there will be keener competition
from foreign enterprises with direct presence in the Mainland. Moreover,
as foreign enterprises will be able to invest directly in the Mainland,
Hong Kong enterprises have to reposition themselves and to gear up
for a more robust intermediary role, in order not to be left behind. |
(3) New economic
order
| 3.10 |
The widespread
use of IT has brought about the emergence of a knowledge-based new
economy. An important feature of the new economy is the growing expectation
of customers on the quality of goods and services, as a result of
market information becoming easily accessible through the Internet
and electronic commerce (e-commerce). Innovativeness, quality and
added value of products and services, rather than price, has become
the crucial factors of success in competition. Moreover, an increasingly
short product cycle calls for enhancement in production techniques,
supply chain management, and IT application. |
(B)
Challenges from local economy
(1) Business
environment
| 3.11 |
As Hong Kong
becomes a world-class city, it unavoidably becomes a more expensive
place to live and to do business. Indisputably, the cost of living
is high in Hong Kong, and so are rents and salaries, particularly
if we compare them with those of neighbouring economies. From a
microeconomic perspective, the solution to high operating costs
lies in the concerted efforts of all parties concerned to exercise
effective cost control to stabilise price levels. However, to address
the problem in the long run, enterprises need to enhance productivity
and value-added capability, focus on innovation, make maximum use
of technology, open up new markets, upgrade product/service quality,
and enhance market knowledge.
|
| |
|
| 3.12 |
The Committee
has made reference to various survey findings and ratings given by
a number of prestigious international organizations(Note
2) on the business environment of
Hong Kong and other major economies. It has also made reference to
the findings of similar surveys conducted by local organizations(Note
3). Overall, Hong Kong continues to receive very high ratings
in a number of authoritative international surveys, notwithstanding
the impact of the Asian financial turmoil on its economy. For example,
in the "Economic Freedom of the World: 2001 Annual Report"
issued in April this year by the Cato Institute of the US and the
Fraser Institute of Canada, Hong Kong was once again rated
the world's freest economy (see Table 3-1). |
|
Table
3-1 : Survey findings and ratings by prestigious international
organizations on the business environment of major economies around
the world
|
|
Economic Freedom
of the World: 2001 Annual Report published by the Fraser Institute
of Canada and the Cato Institute of the United States
|
2001 Index of
Economic Freedom published by the Heritage Foundation of the United
States
|
The World Competitiveness
Yearbook 2001 published by the International Institute for Management
Development
|
The Global Competitiveness
Report 2000 published by the World Economic Forum
|
|
Hong Kong
|
1
|
1
|
6
|
8
|
|
Singapore
|
2
|
2
|
2
|
2
|
|
New Zealand
|
3
|
4
|
21
|
20
|
|
The United Kingdom
|
4
|
7
|
19
|
9
|
|
The United States
|
5
|
5
|
1
|
1
|
|
Australia
|
6
|
9
|
11
|
12
|
|
Ireland
|
6
|
3
|
7
|
5
|
|
Switzerland
|
6
|
9
|
10
|
10
|
|
Luxembourg
|
7
|
5
|
4
|
3
|
|
The Netherlands
|
7
|
8
|
5
|
4
|
|
Canada
|
9
|
14
|
9
|
7
|
| 3.13 |
Surveys conducted
by local organizations also yield very similar results, indicating
that the community is generally satisfied with the business environment
of Hong Kong, and is optimistic about business prospects.
|
| |
|
| 3.14 |
According to
the United Nations Conference on Trade and Development, foreign investment
in Hong Kong in 1999 was among the highest in Asia, second only to
the Mainland. The number of multinational corporations setting up
regional headquarters or regional offices in Hong Kong surged from
2 068 in 1995 to 3 001 in 2000 (see Figure 3-2). Judging from the
foreign investment in the territory, Hong Kong's business environment
remains attractive in Asia. |
| 3.15 |
The aforementioned
surveys show that Hong Kong has an edge over its competitors in
many areas, namely, simple and low taxation, user-friendly procedures
for starting and winding up businesses, stable political environment,
free trade, market-oriented monetary and financial policies, freedom
of speech, a sound and independent legal system, a clean government,
close relationship with major markets in the world, its role as
an intermediary between the East and the West in international trade,
sound IT infrastructure, and quality managerial talent. But whilst
Hong Kong remains attractive to international investors, there exist
some causes for concern. For example, there is still room for improvement
in terms of progress in and awareness of science and technology.
Other areas of concern include high operating costs, less than satisfactory
environmental quality, and a dearth of technological professionals
and research and development capabilities.
|
| |
|
| 3.16 |
The Committee
is of the view that efforts should be taken to improve the aforementioned
areas. On the part of SMEs, they should make good use of Hong Kong's
advantage as an ideal place for conducting business, and focus on
the development of high value-added and quality products/services,
with a view to offsetting the high operating costs and establishing
their own niches. |
| |
|
| 3.17 |
The Committee
notes that the new global brand publicity programme launched by the
Government in May this year, which positions Hong Kong as "Asia's
World City", serves to highlight the unique advantages of Hong
Kong as a major business and commercial centre in the Asian region,
a gateway to the Mainland of China, as well as a city where opportunities,
creativity and entrepreneurship converge. The Committee believes that
this new global strategy will further enhance Hong Kong's international
status and therefore help raise the profile of Hong Kong SMEs in overseas
markets. |
(2)
Financing
| 3.18 |
Financing is
a major concern to SMEs, as it affects their business development.
Traditionally, SMEs in Hong Kong rely on self-financing, i.e.
funds from shareholders and their family members, as their primary
source for raising capital. Secured loans from banks come second.
Before the Asian financial turmoil, the booming local property market
prompted many SMEs to obtain loans from financial institutions with
their properties as collateral. This was a particularly common practice
for many SMEs whose business and financial conditions failed to fully
meet the financial institutions' criteria for approving unsecured
loans, and those which wanted to secure loans with disclosure of minimal
information. As the prices of local properties plummeted after the
financial turmoil, SMEs had found it hard to secure loans with their
properties as collateral. Instead, a firm's financial status and business
prospects have become important considerations for financial institutions
in approving loans. In other words, market forces have caused the
lending mechanism to evolve from counting on "bricks and mortar"
as collateral to counting more on other factors such as enterprises'
financial status, management quality, repayment record and business
prospects as the criteria for approving unsecured loans. In the long
run, such a change will help to get rid of the undesirable phenomenon
of requiring collateral in the form of properties as the prerequisite
for approving loans, and instead encourage banks and financial institutions
to make more objective assessment of loan applications on the basis
of enterprises' potential. |
| |
|
| 3.19 |
However, the
Committee is aware that the "bricks and mortar" culture,
which banks and SMEs are both accustomed to, cannot be changed overnight.
It takes time for banks to learn about the operation of SMEs in order
to have a better understanding of the credit risks of SMEs in general,
and to set up an effective support mechanism for assessing the credit
risks. SMEs on their part need to do away with their traditional disregard
to financial management, transparency and record keeping. Instead,
they need to start maintaining proper financial accounts so as to
facilitate banks or financial institutions to analyse and assess risk
when considering their loan applications. |
| |
|
| 3.20 |
The Committee
believes that the financing problems which SMEs currently encounter
are mainly due to the fact that neither banks nor SMEs are fully geared
for the change in the loan market. That said, the Committee is aware
that in the past year or so, an increasing number of local banks and
financial institutions have introduced a variety of loan facilities
specifically for SMEs. With the exception of some specific financing
activities, such as loans for the procurement of business installations
and equipment, which are still not commonly available, the lending
market at present is very favourable to SMEs seeking to raise capital.
Therefore, it is important for SMEs to quickly improve their weaknesses
in financial management to take advantage of the changes that are
taking place in the market. By doing so, SMEs will stand a better
chance of obtaining financing. |
| |
|
| 3.21 |
As their businesses
grow, SMEs will have a greater demand for capital to support a great
variety of activities, ranging from staff development and application
of new technologies, to acquisition of new equipment and marketing.
The Committee anticipates that as SMEs seek to capitalise on the business
opportunities brought about by the new economy as well as China's
accession to the WTO, they will have an even greater demand for capital.
This makes it more pressing for SMEs to strengthen their financing
capability. |
| |
|
| 3.22 |
As a matter of
fact, given Hong Kong's well-developed financial market and
the sophisticated financial products and services available, there
should be a wide range of financing instruments to meet the needs
of SMEs. However, most SMEs do not seem to be fully aware of the financing
means available in the market. Besides, SMEs in general are unfamiliar
with the financial management requirements which financial institutions
expect of their borrowers. As a result, SMEs often run into difficulties
when trying to raise capital. |
| |
|
| 3.23
|
The Committee
has also noted that the insurance and credit advisory services provided
by the Hong Kong Export Credit Insurance Corporation (ECIC) have greatly
reduced local exporters' risks arising from transactions with overseas
buyers on credit terms. They have also helped ease SMEs' liquidity
problems arising from deferred/default payments. The Committee believes
that ECIC's services, if strengthened, can further relieve the financing
problems facing SMEs in export trade. |
| |
|
| 3.24 |
Finally, while
recognising the importance of financing to the development of SMEs,
the Committee would like to bring home the message that financing
is not the only difficulty that deserves SMEs' attention. SMEs have
to realise that they will not be able to stand up to new challenges
simply by solving financing problems. It is equally important for
SMEs to work on other areas at the same time. The Committee nevertheless
accepts that, with their financing problems solved, SMEs will be better
equipped for expansion and will have greater financial strength to
invest in technology and staff training. This in turn will strengthen
their competitiveness and facilitate their long-term development. |
(3)
Corporate governance and culture
| 3.25 |
With the increasing
globalisation of world economy, the rules of business and commerce
are also undergoing a process of globalisation and standardisation.
These rules impose certain requirements on management methods, corporate
integrity and governance standards of enterprises. Some large local
enterprises have acquired a good understanding of these rules long
ago, and have been endeavouring to perfect their governance methods
and procedures. As a result, their current governance standards are
fully comparable to those of multinational corporations in other regions.
Although SMEs tend to have a simple management structure, they too
must establish a well-defined relationship, as well as clear division
of authority and responsibilities among their stakeholders, such as
the management, board of directors, shareholders, employees and creditors.
Modern enterprises have to observe modern rules of business. |
| |
|
| 3.26 |
The governance
culture in the new economy emphasises initiative, an inquiring mind,
and team spirit. It looks for employees who not only are ready to
innovate and experiment, but also observe the rule of law and integrity.
As this new governance culture is likely to be incompatible with the
existing culture, it is impossible for changes to take place overnight.
Nor can we expect the changes to occur naturally. Instead, the changes
must be top down, complemented with appropriate training and support
with a view to building a new corporate culture to reform the corporate
governance model in order to meet the challenges of the new economy.
SMEs which fail to reform in this regard will lose out in the new
economy. |
| |
|
| 3.27 |
Faced with the
challenges brought about by the three major developments in the world
economy, SMEs need to learn and reform in respect of management skills
and corporate culture if they are to keep pace with the development
of their businesses, develop their capabilities to foresee and manage
changes, as well as capitalise on new business opportunities. However,
judging from their present corporate culture and governance standards,
most SMEs have not fully acquired such capabilities. |
| |
|
| 3.28 |
The
Committee considers that SMEs' weaknesses in corporate governance
have resulted in the following shortcomings :
-
Weak
corporate governance framework
Under
the influence of their inherent business culture, many SMEs
have weak governance framework. Rigorous corporate governance
should include proper supervision over the management. To effectively
monitor the management, shareholders and creditors must be provided
with sufficient information for them to assess the risks facing
the enterprises. Since most enterprises do not need external
financing at the start-up stage, they are unaware of the importance
of governance framework to their financing and development.
However, as enterprises grow, their demand for funds will increase
to an extent that it can no longer be met by the shareholders
alone. Hence, external capital is essential to enterprises at
the development stage, and the effectiveness of their governance
is a deciding factor in their success of obtaining external
capital.
-
Failure
to cultivate corporate culture that fits in with the new economy
In
the new economy, the competitiveness and viability of enterprises,
regardless of their sizes, depend increasingly on the development
of successful strategic partnership with other firms. An enterprise's
bargaining chips in this respect include its financial strength,
track record and, more importantly, its perceived capability
to cope with future changes. For SMEs to manage changes, they
need to cultivate a new corporate culture in support of reforms
and innovations. However, many are still running their businesses
with traditional modes of operation and are not ready for change.
For instance, little importance is attached to corporate management
system, financial management, division of authority and responsibility,
as well as rules and regulations. This has caused them to keep
to primitive modes of governance. Some SMEs lack a good understanding
of the concept of corporate governance and therefore fail to
apply modern management skills and introduce timely reforms
to their mode of governance.
|
(4) Human resources
| 3.29 |
Quality human
resources, including managerial, technological and frontline personnel,
are of paramount importance to the survival and development of SMEs
in the ever-changing business environment. Coordinated efforts on
the part of the Government, training institutes, employers and employees
are required in order to raise the overall quality of the local workforce.
The Government has to draw up a long-term development strategy to
ensure that there will be adequate supply of quality manpower in Hong
Kong. Training institutes must keep a close watch on the needs of
society and provide value-added courses in a timely manner, with a
view to maintaining a high quality workforce. Apart from pursuing
continuous self-enhancement, employers should also encourage and assist
their staff to receive training in order to keep their enterprises
abreast with the times and maintain their competitive edge. Meanwhile,
employees have to acquire new knowledge and enhance their skills,
with a view to maintaining their competitiveness in the labour market. |
| |
|
| 3.30 |
The
Committee, however, notes that most SMEs do not attach much importance
to enhancing the quality of their human resources. The main reasons
include the following :
-
given
SMEs' small scale of operation and their limited number of
staff, those engaging in SMEs, ranging from employers to the
most junior employees, are so preoccupied with their work
that they cannot or are unwilling to squeeze time for training
necessary for enhancing their skills or competence;
-
as
staff turnover rate is generally high in SMEs, some SME employers
consider that the fruit of investing in staff training may
be reaped by their counterparts;
-
some
SME employers do not recognise the significance of staff training
in boosting their staff's productivity and capabilities; and
-
some
SME employers take the view that staff training is not a priority
when the enterprises are short of capital.
|
| |
|
| 3.31 |
The Committee
is of the view that resource allocation for staff training and self-enhancement
in support of long-term business development will be a major challenge
in resource management for SME employers. |
(5)
Technology application
| 3.32 |
The successful
application of technology to maintain a competitive edge is another
key factor determining whether an SME can survive and prosper. The
application of technology in SMEs involves two major areas, namely
applied technology and IT. The Committee notes that SMEs in general
have certain knowledge about the new technology and equipment applicable
to their trade. However, constrained by shortage of capital, SMEs
often fail to introduce new technology and equipment, therefore undermining
their productivity and efficiency. |
| |
|
| 3.33 |
Regarding IT
application, the Committee has made reference to the "Survey
on Information Technology Usage and Penetration in the Business Sector",
conducted by the C&SD in 2000. The survey shows that large enterprises
in Hong Kong are making good progress in IT application, with nearly
90% of them having personal computers and over 70% having access to
the Internet. As for SMEs, the survey reveals that there is a very
notable gap in IT application between medium enterprises and small
enterprises (i.e. those with fewer than 10 employees). The former
is not far behind the large enterprises in IT application. For instance,
nearly 80% of them have personal computers, and over 60% have access
to the Internet. As for the small enterprises, only less than 50%
of them have personal computers and about 30% have access to the Internet
(See Table 3-2). |
|
Table
3-2 : IT application in enterprises in Hong Kong
|
|
State of IT
application
|
Overall
|
Large
Enterprises
|
Medium
Enterprises
|
Small
Enterprises
|
|
Percentage of
organizations (Note 4) equipped
with personal computers
|
52.5%
|
92%
|
78%
|
48%
|
|
Percentage of
organizations having access to the Internet
|
37.3%
|
78%
|
63%
|
34%
|
|
Percentage of
organizations having their own webpage/website
|
7.3%
|
43%
|
18%
|
5%
|
| 3.34 |
The survey reveals
some worrying phenomena. Among those SMEs which do not have computers,
only less than 5% have plans to install them. Among those that have
no such plan, almost 75% consider that installing computers would
not be beneficial to their businesses; whereas 16% indicate that a
lack of computer-literate staff has inhibited them from making good
use of IT. |
| |
|
| 3.35 |
The Committee
believes that the next few years will be a crucial time in determining
whether SMEs can successfully ride on the IT superhighway. Not only
will SMEs need to use IT in their operation to cut costs and enhance
productivity, the prevalence of e-commerce has also brought about
a revolutionary impact on the mode of operation of SMEs. In particular,
the use of mobile phones in e-commerce (mobile commerce) is an emerging
trend. The world has begun to notice the phenomenon of "digital
divide" in societies where enterprises or individuals who can
make good use of IT become more and more successful, while those who
cannot gradually lose their competitiveness. Therefore, if SMEs fail
to apply IT and provide proper training for their staff to prepare
for the age of e-commerce and mobile commerce, their development and
competitiveness will be seriously hampered in the long run. On the
other hand, the Government also has to ensure an adequate supply of
IT personnel on the market to assist SMEs in IT application. |
(6)
Market expansion
| 3.36 |
Market expansion
is an important step for SMEs to develop. To secure and increase their
market share, SMEs must understand the changes and trends of the market,
and to map out their strategies in time. However, the Committee has
found that, due to their limited sizes and resources, SMEs often cannot
accurately master market information and therefore fail to grasp business
opportunities. |
| |
|
| 3.37 |
Take the local
market as a case in point. The local economy has slackened in recent
years as a result of the Asian financial turmoil, leading to a plunge
in local consumption power and desire. At the same time, more and
more Hong Kong people travel north to the Mainland to spend
and shop, attracted by the cheaper prices there. That has dealt a
further blow to the local retail and catering sectors. |
| |
|
| 3.38 |
In an increasingly
globalised world economy, SMEs have to face not only internal competition
but also international challenges. However, constrained by resources
and ability, most SMEs have not been able to use IT to collect and
analyse overseas market information. Nor have they been able to frequently
participate in overseas promotion/trade fairs. As a result, SMEs are
constrained in their ability to penetrate into the distribution network
of overseas markets, establish their network with overseas buyers,
and foster strategic partnership with overseas enterprises. |
| |
|
| 3.39 |
In the Mainland
market, our SMEs have abundant experience in doing business there
and have been playing the role of the middleman in fostering closer
economic and trade relationship between the two places since as early
as 1978 when the Mainland implemented its economic reform and open
door policy. However, as Mainland's policy restricts the proportion
of goods manufactured in the Mainland by outside investors for internal
distribution, Hong Kong's SMEs in the Mainland mainly manufacture
products for overseas buyers, i.e. they are engaged in processing
trade such as original equipment manufacturing, with little emphasis
on developing their own brands or products. Also, they rarely venture
into the Mainland domestic consumer market. With China's impending
accession to the WTO and the active development of the cities and
provinces in western China, the Mainland market will open further.
Its market economy will develop and its economy will transform at
a quicker pace. Rules and regulations governing market liberalisation
will gradually be implemented and given more transparency; and foreign
trade and investment activities will significantly increase. Our SMEs
must get prepared for all these changes. |
| |
|
| 3.40 |
It is not easy
for SMEs whose resources are limited to stand up to and meet the enormous
challenges of the market. Hence, the Committee is of the view that
the Government and other support organizations such as the Hong Kong
Trade Development Council (TDC) must render more assistance to SMEs,
to help them gain market access by collecting, analysing and releasing
the most up-to-date market information; providing them with professional
consultation services; and helping them resolve the difficulties encountered
in market expansion. |
(Note
2) : Reference has been made to the following survey reports published
by prestigious international organizations:
-
The
annual Index of Economic Freedom published by the Heritage Foundation
of the US;
-
Economic
Freedom of the World: Annual Report published by the Fraser Institute
of Canada and the Cato Institute of the US;
-
The
annual Global Competitiveness Report published by the World Economic
Forum; and
- The World Competitiveness
Yearbook published by the International Institute for Management Development,
Lausanne Switzerland.
(Note
3) : Reference has been made to the following survey reports published
by local organizations:
-
The
annual Business Confidence Survey published by the Better Hong Kong
Foundation and International Hong Kong;
-
The
quarterly Business Operating Environment Index for SMEs published
by the Hong Kong Productivity Council;
-
The
Business Outlook Survey conducted by the American Chamber of Commerce
in Hong Kong;
-
Business
Confidence Survey conducted by the British Chamber of Commerce in
Hong Kong among its member companies;
-
Surveys
of Hong Kong's Business Environment conducted by the Hong Kong Japanese
Chamber of Commerce and Industry among Japanese businessmen;
-
The
annual Survey on the Number of Regional Headquarters and Regional
Offices in Hong Kong conducted by the Census and Statistics Department;
-
Related
surveys conducted by the Hong Kong Institute of Asia-Pacific Studies
of the Chinese University of Hong Kong and the Hong Kong APEC Study
Centre; and;
-
Business
Prospects Survey conducted by the Hong Kong General Chamber of Commerce.
(Note
4) : Organizations are categorised according to their respective number
of employees as at 30 December 1999. Large enterprises refer to those
with 100 or more employees in the manufacturing sector, or those with
50 or more employees in non-manufacturing sector. Small enterprises broadly
refer to those, irrespective of trades, with fewer than 10 employees.
The remainder is counted as medium enterprises.
Chapter
4 : Proposals to help SMEs start, build and expand their businesses
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